What influences interest rates?

by The Motley Fool - Jul. 15, 2010 12:00 AMUniversal Press Syndicate

Question: What makes interest rates go up and down?

Answer: Interest rates are strongly influenced by inflation and the market for debt (notes, bills, bonds, etc.). With inflation rather low in recent years, we've been enjoying low interest rates. (Even if they rise a bit, they will still be really low, historically speaking.)

These days, we're looking forward to recovering from our recession. But if the economy appears to be growing too briskly, the Federal Reserve may hike short-term interest rates via the "federal funds rate" in order to slow growth. (The federal funds rate is the rate a bank can charge another bank for use of its excess money.)

When the economy is sluggish, the Fed often cuts rates, as lower rates give companies and people an incentive to borrow (and spend) money.

The Fed can also change the "discount rate" - the rate paid by a bank to borrow short-term funds from the Fed.

The prime rate and other interest rates are based primarily on these two interest rates, while mortgage rates are linked to Treasury bill rates. The money markets themselves (basic supply and demand for money) also exert great influence over interest rates.

Q: What are a company's audited financial statements?

A: Publicly traded companies are required to report on their earnings and financial condition each quarter. Once a year they issue comprehensive "10-K" reports, along with their annual report. In the intervening quarters, they issue less substantial "10-Q" reports. 10-K reports include details on the company's recent performance, risks and more, and their financial statements are audited. 10-Q reports, though, are not required to be audited.